Filing for bankruptcy is often a courageous course of action. Oftentimes, filers need to overcome preconceived perceptions about bankruptcy, navigate the stigma that others have learned over time, and beat back fears about the future in order to take necessary steps to regain solid financial footing. Addressing your outstanding debts by filing for bankruptcy will result in a few initially negative consequences, including a notation of your filing on your credit history that will remain there for several years and a significant drop in your credit score. However, if you approach the aftermath of your bankruptcy filing in specific ways, the benefits of bankruptcy may ultimately far outweigh the temporary negative effects associated with your filing.
How Could Filing For Bankruptcy Possibly Benefit Someone’s Credit?
When you submit your bankruptcy petition to the court, you will begin the process of reorganizing and/or discharging your outstanding debts. The bankruptcy process progresses differently, depending upon which Chapter of the Bankruptcy Code you file under. Chapter 7 filers, for example, will have their eligible debts discharged within a matter of a few months. They are not obligated to repay their creditors first. By contrast, Chapter 13 filers reorganize their debts and make one manageable debt-related payment per month for 3-to-5 years before their remaining debt balances can be discharged.
The major credit bureaus are all notified of these arrangements by the courts once they are put into place. This is how a notation concerning someone’s bankruptcy case ends up on their credit report. At the time that someone files bankruptcy, it won’t be immediately apparent to lenders whether someone is utilizing the process responsibly or not.
If, after a relatively short period of time, a bankruptcy filer starts ratcheting up debt again that they are unable or unwilling to pay – and that debt does not stem from medical bills incurred beyond someone’s control – lenders will surmise that the filer used the process simply as a means to avoid repaying their financial obligations. If, however, a bankruptcy filer starts responsibly rebuilding their credit in the wake of a bankruptcy filing, lenders may come to perceive – over time – that filing for bankruptcy was an actively responsible choice to address temporary financial challenges and an inability to repay debt.
Meaning, after a year or two, creditors may start to view someone’s bankruptcy filing as an asset to their reputation, not a burden. Even though a filer’s credit score will take some time to rebound, the bankruptcy notation on someone’s credit history itself will become less burdensome to their future the longer that they are able to make responsible financial decisions in the wake of a bankruptcy filing.
Rebuilding Your Credit Score During Bankruptcy
If you have decided to file for bankruptcy, you may be – very understandably – eager to start rebuilding your credit score the instant that your bankruptcy case has been resolved. In fact, you can start setting yourself up for success even before your case is closed.
If you are filing for Chapter 7 bankruptcy, you can work with an attorney to better ensure that you’re making informed decisions about any secured debts that you may or may not wish to reaffirm. If you simply can’t afford your car loan, for example, it may be wise to resolve that ongoing source of stress and debt by surrendering your vehicle during the bankruptcy process so that you don’t set yourself up for more missed payments and late fees on that account once your eligible unsecured debts have been discharged.
If you are filing for Chapter 13 bankruptcy, you can work with your attorney to be as proactive as possible when reorganizing your debt. You can use the protection afforded by the automatic stay to your advantage. Have your attorney explore the possibility of loan modification for some of your secured debts, for example. If you can benefit from more favorable terms as soon as your case is complete, your repayment of those debts will likely be far more manageable as you move forward.
Rebuilding Your Credit Score After Bankruptcy
The single most effective action you can take in the wake of your bankruptcy case to start rebuilding your credit – until it is stronger than it has ever been – involves paying your bills on time. Any time you submit a late or inadequate payment to a creditor, that creditor may report your activity to the credit bureaus. This is generally how a credit history starts to look less than favorable over time. By appropriately repaying your financial obligations on time and in whatever amount you agreed to pay (at minimum) consistently, you’ll begin to demonstrate a pattern of favorable consumer finance behavior. Over time, this will lead your score to increase and lenders to again become interested in working with you.
Additionally, it will help to keep your debt-to-credit ratio low. Meaning, if you start taking out credit cards again, don’t max them out. Ideally, keep your balance on each account at 15% or lower of your total available credit. This will demonstrate that you are not so strapped for cash that you need to start running up significant debts again.
Connect With A Skilled Arizona Bankruptcy Lawyer For Additional Guidance
There are other ways to potentially rebuild your credit both relatively quickly and with the potential for “staying power” that should only be used under certain circumstances. The knowledgeable bankruptcy attorneys at Perez Law Group, PLLC can provide you with personalized strategies designed to help you regain strong financial footing far sooner rather than later.
You can either call (602) 730-7100 or fill out a contact form on our website to schedule a risk-free legal consultation. Once you’re in a position to make truly informed decisions about your financial circumstances, we can help you execute them. We look forward to speaking with you.